Indonesia Closes Troubled Banks as Part of Economic Bailout

Published: November 2, 1997

JAKARTA, Indonesia, Nov. 1—
Indonesia closed 16 shaky banks today, one day after the International Monetary Fund offered a multibillion-dollar program to stabilize the nation's economy.

Finance Minister Marie Muhammad said the Government would reimburse up to $5,555 in each account, an amount that would fully repay 94 percent of depositors.

Reform of the financial and banking sector was one of the key areas in the package announced on Friday by the Government and the I.M.F.

Mr. Marie said at a news conference today, ''These banks are insolvent to the point of endangering business continuity, disturbing the overall banking system and harming the interests of society.''

There was no indication of the number of deposits involved or the size of debt of the 16 banks, which were closed with immediate effect.

Political analysts said the authorities were concerned about the possibility of social unrest as austerity is coupled with rising prices and unemployment, especially in urban areas on the island of Java, home to 60 percent of the country's 200 million people.

In his statement, Mr. Marie appealed to ''all members of society to remain calm'' during reform of the banking system.

State Secretary Moerdiono, who like many Indonesians uses one name, said that the Government would announce further deregulation moves on Monday. Banking officials said these would focus on trade and production sectors, and include tariff cuts to stimulate exports.

On Friday, the managing director of the fund, Michel Camdessus, announced $10 billion in assistance to Indonesia, along with $4.5 billion from the World Bank and $3.5 billion from the Asian Development Bank.

''These measures should restore confidence in the Indonesian economy and contribute to the stabilization of regional financial markets, and I hope beyond,'' he said.

Indonesia said it expected a fall in economic performance over the coming two years but hoped to return to 7 percent annual growth by 2000.

Singapore and Japan each pledged $5 billion today to supplement the fund's assistance, and the United States has agreed to $3 billion as a backup, while Malaysia and Australia have offered $1 billion each.

The total amount available far exceeds the $17.2 billion made available to restore Thailand's economy earlier this year. Dewi Fortuna Anwar, a political analyst, said President Suharto's acceptance of the package indicated pragmatism on his part, and confidence that his legacy of economic expansion would be preserved. ''His reputation was on the line,'' she said. ''He wants to go down as the President who pushed Indonesia out of poverty.''

The Central Bank president, Sudradjad Djiwandono, said on Friday that the Government would liquidate banks that were beyond rescue. ''Unhealthy banks will follow a process of acquisition or merger,'' he said. ''But banks that cannot be rescued will be liquidated.''

In a study in June, the World Bank identified the banking industry as the weakest part of the Indonesian economy and said that restoring it was the key to a healthy economy.

''At that time the World Bank's leverage was very little,'' a financial analyst said. ''But now, after the package, it can insure that these reforms are pushed through.''

Indonesia sought assistance from the monetary fund and other agencies early in October after months of turmoil in its financial markets.

Its currency has depreciated some 30 percent against the dollar since regional currency became more volatile in July. The stock market index has shed some 32 percent over the same period.